Pinning Down Castle Biosciences, Inc.'s (NASDAQ:CSTL) P/S Is Difficult Right Now

When close to half the companies in the Healthcare industry in the United States have price-to-sales ratios (or "P/S") below 1.1x, you may consider Castle Biosciences, Inc. (NASDAQ:CSTL) as a stock to potentially avoid with its 2.3x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

See our latest analysis for Castle Biosciences

How Castle Biosciences Has Been Performing

With revenue growth that's superior to most other companies of late, Castle Biosciences has been doing relatively well. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. However, if this isn't the case, investors might get caught out paying too much for the stock.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Castle Biosciences.

Is There Enough Revenue Growth Forecasted For Castle Biosciences?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Castle Biosciences' to be considered reasonable.

Retrospectively, the last year delivered an exceptional 62% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 261% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Looking ahead now, revenue is anticipated to climb by 0.6% per year during the coming three years according to the eight analysts following the company. With the industry predicted to deliver 8.3% growth per annum, the company is positioned for a weaker revenue result.

With this in consideration, we believe it doesn't make sense that Castle Biosciences' P/S is outpacing its industry peers. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What We Can Learn From Castle Biosciences' P/S?

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Castle Biosciences, this doesn't appear to be impacting the P/S in the slightest. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Castle Biosciences you should know about.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.